Steps to Manage Cashflow Strain from Extended Payment Terms
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For many UK businesses, offering extended payment terms of 60, 90, or 120 days is often necessary to secure and retain high-value clients. Large corporate buyers and public sector organisations tend to dictate their payment terms, leaving smaller suppliers with little choice but to comply. While these arrangements may win contracts and strengthen customer relationships, they can also create significant cashflow strain.
Delayed receivables can tie up working capital for months, limiting liquidity and leaving companies exposed. Without careful planning and swift corrective action, extended payment terms can quickly erode financial resilience and jeopardise growth.
In today’s environment, where economic uncertainty, rising interest rates, and supply chain disruption already weigh heavily on businesses, maintaining strong cashflow is more important than ever. Recognising the early signs of strain and responding effectively is essential for long-term stability.
This article outlines three practical strategies UK business leaders can adopt to mitigate cashflow stress caused by extended payment terms.
Strategy #1. Spot the early indicators of cashflow stress
Cashflow rarely collapses overnight. Instead, problems build gradually and present early warning signs that business leaders must learn to identify. By monitoring financial health regularly, companies can anticipate challenges and take proactive steps before issues escalate.
Warning signs to watch for:
- Slower inflows despite healthy sales
Sales figures may look strong, but if cash receipts lag far behind, it indicates customers are stretching payment terms further or delaying altogether. - Growing Days Sales Outstanding (DSO)
A rising DSO indicates that invoices are taking longer to be settled. For companies trading internationally, where payment cycles are often longer, this is a critical metric to watch. - Increased reliance on overdrafts or loans
Regularly drawing on overdraft facilities or short-term loans out of necessity, rather than opportunity, signals that operating funds are stretched. - Difficulty meeting payroll or supplier payments
Missing wages or delaying supplier settlements is one of the clearest signs of liquidity stress, which can harm staff morale and erode supplier trust. - High and rising receivables balances
Invoices piling up on your books may reflect extended terms draining resources and can disguise the true liquidity position. - Delays in purchasing inventory or raw materials
If cash shortages prevent timely restocking or production, growth can stall, leading to lost revenue opportunities. - Missed opportunities or client prioritisation
Liquidity shortages can force businesses to prioritise fast-paying clients over larger but slower-paying ones—sacrificing growth for survival.
Spotting these symptoms early allows leaders to act quickly before cashflow issues turn into a full-blown crisis.
Strategy #2. Take Immediate Corrective Actions
Once signs of stress emerge, companies must take decisive steps to stabilise cashflow. Immediate corrective measures focus on optimising collections, improving forecasting, and bridging gaps with financing solutions.
1st Step: Improve Collections and Invoice Management
- Invoice promptly and accurately
Invoices should be sent as soon as goods or services are delivered. Delays in invoicing only compound cashflow challenges. Accuracy is critical—errors create disputes that can delay payment even further. - Reinforce payment terms and follow up
Extended terms are already a compromise; allowing further slippage is dangerous. Regular reminders, polite but firm follow-ups, and clear communication help keep clients accountable. - Offer early payment incentives
Some customers may be willing to pay sooner despite having extended payment terms if offered a small discount or alternative payment options. This tactic can improve liquidity without damaging the relationship. - Leverage automation
Billing and collections software can streamline processes, reduce administrative burdens, and ensure consistent follow-up without overloading staff.
2nd Step: Strengthen Cashflow Planning
- Increase the frequency of forecasts
Moving from monthly to weekly or even daily forecasts helps anticipate shortfalls earlier and improves responsiveness. - Adopt rolling forecasts
Incorporate both best- and worst-case scenarios into financial planning to stress-test liquidity and prepare contingency plans. - Prioritise and control spending
Delay discretionary projects, non-essential purchases, or large capital investments until cashflow stabilises. Focus resources on core operations.
3rd Step: Explore Financing Solutions for Immediate Relief
Specialist financing solutions can bridge gaps caused by extended payment terms and restore liquidity quickly. UK businesses have access to a range of tools, including:
- Invoice Finance (Factoring)
Convert unpaid invoices into immediate working capital. Typically, up to 90% of the invoice value is advanced within 24 hours (minus a small fee), with the balance released once the customer pays. This option is particularly valuable for exporters dealing with lengthy overseas payment cycles. - Invoice Discounting
Similar to invoice finance but confidential, allowing businesses to retain control of their customer relationships while still unlocking liquidity. - Asset-Based Lending (ABL)
Businesses with significant assets such as receivables, stock, or equipment can unlock capital through an ABL facility. This flexible line of credit provides scalable working capital to manage long payment cycles.
Strategy #3. Turn Symptoms into Strategic Opportunities
Cashflow challenges caused by extended terms are not just problems to fix, they can also be opportunities to strengthen the business for the future.
Build Financial Resilience with Specialist Finance
Alternative funders specialising in invoice finance, discounting, and ABL are often more flexible than traditional banks. They can provide covenant-light facilities of up to £6 million. With the right partner, businesses can weather short-term pressures and build resilience for the long term.
Enhance Operational Discipline
Extended terms force businesses to become more disciplined in areas such as invoicing speed, forecasting accuracy, and credit control. By embedding stronger financial processes, companies can create a more robust operating model.
Position for Growth
Unlocking liquidity through financing solutions enables businesses to replenish inventory, invest in operations, and capitalize on new opportunities—even when large customers require extended payment terms. This proactive approach enables sustainable, scalable growth despite challenging market conditions.
Conclusion
Extended payment terms have become a mainstream practice in the UK, driven by buyer power and competitive pressures. While they can help secure contracts, they often place suppliers under considerable financial strain.
The path forward lies in early detection, swift corrective measures, and strategic use of financing:
- Monitor indicators such as DSO, receivables balances, and reliance on credit facilities.
- Act quickly by optimising invoicing processes, forecasting cashflow more frequently, and controlling costs.
- Leverage specialist finance to bridge liquidity gaps, whether through invoice finance, supply chain finance, or ABL.
- Work with experienced partners who understand your industry and can provide tailored support.
- Build long-term resilience by using these challenges to strengthen systems and unlock sustainable growth.
If your business is struggling under the weight of extended payment terms, now is the time to act. Specialist funding providers can offer flexible solutions, hands-on support, and the confidence to navigate liquidity challenges. By addressing symptoms early and strategically, you’ll not only safeguard stability but also position your business to thrive.
Contact us when you recognize the symptoms of strained cashflow. Our experienced financial experts will help guide you in taking the right actions and introduce you to flexible specialty financing options to overcome liquidity issues.
Key Takeaways
- Extended payment terms are common but can significantly strain UK businesses’ cashflow.
- Early warning signs include rising DSO, growing receivables balances, and difficulty paying suppliers or staff.
- Corrective actions include improving invoicing, strengthening cash forecasts, and prioritising expenses.
- Financing solutions such as invoice finance, invoice discounting, supply chain finance, and ABL can provide rapid relief.
- Tackling cashflow strain strategically builds resilience, enhances discipline, and creates opportunities for long-term growth.
eCapital UK
eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £4m to support the growth of SMEs through the provision of flexible working capital facilities. With five fully functional UK regional offices, its local teams are uniquely placed to respond promptly and purposefully to the cashflow needs of its clients. The business has grown significantly since its launch in 2001, providing over £12 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.
